(Bloomberg) -- Asian refiners struggling with record-low margins are resisting cutting operating rates on expectations that new rules mandating the use of cleaner-burning ship fuels will boost diesel demand.
Nine of ten major Chinese, Indian and South Korean processors surveyed by Bloomberg said they’re running at normal run rates and not planning to reduce them, asking not to be identified because of internal policy. Only one -- a Chinese refiner -- said it would cut run rates by about 5% of its total capacity in December.
An expected jump in returns from making diesel next year as ship-owners switch to cleaner-burning fuels due to new International Maritime Organisation standards was the main reason the refiners gave for not cutting activity. Peak winter consumption of heating fuels was also cited by some of the processors.
A wave of new mega-refineries starting up, still elevated freight rates following U.S. sanctions on Chinese shippers and slowing economic growth have conspired to push down returns. Margins from turning crude into fuels in Singapore have plunged from more than $10 a barrel in mid-September to a record low of -$1.87 late last month, according to Oil Analytics data.
“If you look at the current margins, it does look bad, but 2020 is shaping up to be a better year for refining in Asia,” said Victor Shum, vice president of energy consulting at IHS Markit Ltd. in Singapore. “The need for IMO-compliant fuels is expected to pick up, supporting diesel cracks and hydrocracking margins, especially from the second quarter.”
See also: Momentous Shipping Fuel Shake-Up Playing Out in Unexpected Ways
The rules, known as IMO 2020, take effect from Jan. 1 and ban vessels from using fuel with more than 0.5% sulfur unless they’re fitted with pollution-reducing scrubbers. Gasoil prices, which are expected to benefit, haven’t reacted significantly yet. Returns from making diesel from crude in Singapore jumped 6.3% on Monday, paring the loss this quarter to around 19%, according to data from PVM Oil Associates.
“What we’re hoping to see is, in coming weeks or days, shippers start to see a need to buy marine gasoil,” Alan Gelder, vice president for refining, chemicals and oil markets at Wood Mackenzie Ltd., said last week. “With high-sulfur fuel oil being so weak, shippers will use it as long as they can.”
Margins need to stay lower for longer for refiners to start cutting processing rates, Energy Aspects Ltd. said in a note last week. Forward margins for diesel are currently positive, reducing the incentive to curb activity.
In China, new mega-refineries are ramping up, teapots need to use up their import quotas and refiners want to make sure they have product stocks for the Lunar New Year, said Michal Meidan, director of the China energy program at the Oxford Institute for Energy Studies. Overall runs could soften a bit, but they will still be “massively higher” than last quarter, she said.
Gasoil margins in China are also being supported by a shift to higher standards for diesel, said Liu Yuntao, an analyst at Energy Aspects in London. The move, to take place next year, is aimed at curbing pollution.
Refiners in South Korea may also attempt to drain their crude inventories before the end of the calendar year for accounting reasons, according to IHS Markit’s Shum.
Meanwhile, in India rising gasoline consumption is aiding the outlook. After plunging to a 14-year low of 94.7% in September, refinery processing rates recovered to 103.5% of installed capacity in October, according to Indian government data.
“There’s ample demand within India for the refiners to continue running without any cuts,” said R. Ramachandran, refineries director at Bharat Petroleum Corp. “Gasoline demand is growing close to double-digit and diesel consumption remains stable. We expect diesel margins to keep rising as IMO 2020 kicks in.”
(Updates with comment on Chinese diesel standard change in 10th paragraph.)
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